How Do Investors Interpret China’s Political Reforms? Empirical Evidence from the Chinese and U.S. Stock Markets

This paper investigates how Chinese and U.S. investors have interpreted the term limit cancellation of China’s President Xi Jinping on February 26, 2018. By employing a propensity score matching technique and difference-in-differences analysis, we find that Chinese companies listed in the U.S. significantly underperformed compared to their corresponding Chinese firms listed domestically in China. Our empirical analysis provides strong evidence that Chinese and U.S. investors interpret this political event differently. Specifically, the event had a substantial negative impact on the stock returns of Chinese firms listed on American stock exchanges, while it was viewed optimistically by local Chinese investors. In additional analyses, we find that the stock price reactions of our sample firms are influenced by their political connectedness to the government bodies in China. Our paper demonstrates that political events can be interpreted very differently and that investors’ interpretations appear to follow the prevailing political views in a given country.